Cash Strapped and Out of Work: Why Fewer Americans Own a Home

This past October, the home ownership rate in the U.S. plummeted to 64.4%, it’s lowest level since the fourth quarter of 1983, more than 30 years ago. This news probably doesn’t come as much of a surprise to you; if you’ve been paying attention to headlines at all over the past year or so, you’re likely aware that home ownership in America is becoming a dying institution. What many Americans are less clear about, however, is why home ownership is faltering.

One of the most interesting aspects of the trend away from home ownership is how quickly the shift happened; it wasn’t all that long ago that home ownership was on the rise. As recently as 2005, for instance, home ownership in the U.S. was at an all-time high, with nearly 70% of Americans claiming to own their own home. How the mighty have fallen, eh?

Some of you may be thinking: well, of course Americans aren’t buying houses, we just got out of a recession. This is absolutely true. The housing bubble and subsequent recession hit Americans hard. Yet, according to a recent New York Times report, the home ownership rate is likely to continue falling despite the economic recovery. In other words, we haven’t even hit rock bottom yet.

So, we know that the recession hit Americans hard, and we know that home ownership has been on a worsening decline since the bubble burst, but what’s really behind the stagnating growth of home ownership in America? Is it just the economy, or is something else at work here?

Turns out, like so many issues, it’s complicated; here are the three major reasons we found determining the stagnating rate of home ownership in America.

Millennials aren’t buying homes… yet

One of the biggest reasons behind the low home ownership rate in the U.S. these days — a rate which is predicted to continue falling — is the millennial generation. This up-and-coming young generation, which also happens to be the country’s largest ever, would, under past conditions, theoretically be buying homes now. Alas, the generation that came of age during the Great Recession remains largely unable to afford the cost of home ownership, among other things.

“The falling home ownership in recent years is partly due to the struggles of first-time buyers,” said the National Association of Realtors chief economist Lawrence Yun, per Realtor.com. “Lower wages and larger student debts among recent college graduates have limited the millennial generation from taking advantage of the historically low interest rates,” he added. In other words, millennials are poorer than previous generations were when they set out to buy their first home.

The evidence shows in the numbers, too. The home ownership rate among young Americans — those under the age of 35 — is just 35.9%, another historic low, according to Realtor.com

Another economist, Yelena Shulyatyeva, who works with BNP Paribas in New York, commented that she’s not at all surprised that young people are putting off home ownership, and notes that, home ownership may just be another aspect of adulthood which millennials are delaying due to the recession. “The shock from the financial crisis is still here,” she said, in an interview with Reuters.

Other economists note that while joblessness is less of a problem in 2014 than it was in say, 2008, and while the economy has shown other important signs of recovery, lackluster wage growth is a crucial issue; one that is directly related to America’s low rate of home ownership among young people.

Economists like Dr. Stan Humphries, who works as chief economist for Zillow Inc., notes that the downside of a low home ownership rate among millennials is that rents will continue to remain sky high. “A lower home ownership rate because of these demographic shifts will have a ripple affect, keeping rents high and potentially impacting the broader economy if substantially fewer people pay property taxes and buy fewer home goods,” Humphries said, in a statement per MarketWatch.

But Humphries cautions readers not to assume that the millennial generation will never become home owners. Recent research at Zillow, Humprhies says, indicates that many millennials who are currently renting want to buy soon, despite the myriad challenges they face. “And when they do, policymakers, planners, and developers will need to ensure that housing is accessible, affordable, and desirable to this new generation of homeowners,” he added.

Banks are stingier, consumers are poorer

It’s not just people who are still recovering from the recession, banks continue to maintain the stringent lending standards they adopted in the aftermath of the Great Recession. Further, banks aren’t just being more careful about who they lend to, they’re also lending at higher rates for mortgages.

Economist Patrick Newport, says that if banks maintain the tightened credit standards they have now, it’s going to encourage a shift towards renting. “We are becoming more of a rental society,” he said in an interview with Reuters.

But stingier banks don’t tell the whole story either, economist Jed Kolko, chief economist at Trulia, noted in a recent New York Times piece that stagnating wage growth has remained a huge obstacle to home ownership for many Americans.

There’s been a lot of celebration regarding the unemployment rate, which hit a six-year low in October, and the country has long since recovered the jobs lost during the recession, but a difficult combination of high mortgage rates, relatively high home prices, and slow-to-grow wages all make buying a home tougher now that it has been over the past few decades.

“It’s way too soon to conclude that the market has healed and returned to the old normal,” said Terry Loebs, founder of Pulsenomics LLC, who helped conduct a panel survey of 104 economists, real estate experts and investment and market strategists in partnership with Zillow, Inc. Economists say that the continuing demand for rental units and comparatively weak growth in groundbreaking for single family homes indicates that the housing market’s recovery will remain sluggish for quite a while.

The invisible masses, otherwise known as “couch surfers”

But stingy banks and a cash-strapped millennial generation don’t quite make up the whole equation. Kolko says that the home ownership rate can be misleading because “it omits people who are not in the housing market themselves as owners or renters.”

He likens this phenomenon to a “better-known shortcoming of the unemployment rate, which doesn’t count people who are ‘not in the labor force’ for various reasons, including having given up looking.”

Many of these “couch surfers” who are effectively out of the housing market are the very same cash-strapped millennials we mentioned earlier, says Kolko. “We are not seeing much growth in household formation, which means that young people graduating from college are moving in with their parents. That trend has not changed much and is the key reason why the housing recovery has been so weak.”

Kolko argues that because the home ownership rate is misleading, we ought to instead look to the “headship rate,” that is, the percentage of adults who head a household, in order to gain a more accurate picture of home ownership in America.

“The headship rate for 18- to 34- year-olds dropped three times as much as adults overall, largely because the share living with their parents climbed to the highest level in decades,” Kolko notes.

And while the assumption lately has been that all of these couch surfers are unemployed or underemployed millennials who’ve decided to crash in their mom’s basement, that’s actually not the whole story. Many of those who are effectively “out of the housing market,” are elderly Americans, though the New York Times notes that “among those 65 or older in the United States…the foreign-born are four times as likely as the native born to live with relatives rather than in their own household,” indicating that there’s a cultural element at play here as well.

And while the housing market may seem bleak, Lawrence Yun, chief economist for the National Association of Realtors, notes that even those millennials who are currently living with their parents will eventually buy homes as the economy improves. They will “seek out their own housing with an improving economy, first as renters before making the shift to home owners. This trend also means that housing demand for both home purchases and rentals will be on the increase.”